Can Family Members Be Paid by a Private Foundation? (w/Examples) + FAQs

Quick Answer

Yes. A private foundation can pay family members for tax year 2025, but only “reasonable” compensation for “personal services” that are “reasonable and necessary” to its charitable purpose. Pay that is excessive, or for non-personal services, is illegal self-dealing under IRC Section 4941 and triggers a 10% excise tax.

This is one of the trickiest rules in private foundation law because your relatives are almost always “disqualified persons,” and a foundation is normally banned from any financial dealing with them. Congress built one narrow doorway for paying them. Step through it correctly and your daughter can draw a real salary as executive director. Step wrong, and the IRS can tax the payment, claw it back, and in the worst cases pull your tax-exempt status.

The stakes are immediate. Self-dealing taxes apply each year the problem goes uncorrected, the first-tier tax lands on your relative personally, and a second-tier tax of 200% can follow if you do not fix it in time. This article walks the founder, the board member, and the family employee through the rule, the math, and the paperwork.

This article reflects federal rules as of June 2026 and covers tax year 2025. State charity rules vary. Tax law changes — confirm current figures before you file. This is educational information, not legal or tax advice for your specific situation.

Here is what you will learn:

• 🚪 The one exception that lets a foundation legally pay a “disqualified person”
• 💰 How to set “reasonable compensation” so the IRS cannot call it excessive
• 🧾 Which jobs count as “personal services” — and which ones (janitor, handyman) never do
• ⚠️ The 10%, 5%, 200%, and 50% excise taxes, with worked dollar examples
• 📋 How to report family pay on Form 990-PF Part VIII and keep yourself audit-ready

What “Self-Dealing” Means and Why Family Pay Is Risky

A private foundation is a charity usually funded and controlled by one family or company. Because the same people often sit on both sides of the table, federal law assumes the worst and blocks nearly every financial transaction between the foundation and its “insiders.” That ban lives in IRC Section 4941, which lists “acts of self-dealing.”

Self-dealing is broad on purpose. It covers selling, leasing, or lending between the foundation and an insider, and it specifically covers “any direct or indirect transfer to, or use by or for the benefit of, a disqualified person of the income or assets” of the foundation, per the Treasury regulations on self-dealing. Paying your relative a salary is exactly such a transfer. So the default answer is “no” — and then one exception flips it to “yes.”

The consequence of getting this wrong is not a polite letter. A prohibited payment is taxed even if the foundation got fair value and even if everyone acted in good faith. The transaction is judged on its structure, not your intentions. That is why families treat compensation as a compliance project, not a casual HR decision.

The misconception to kill early: “It is my family’s money, so we can pay ourselves what we want.” Once you fund a private foundation and take the charitable deduction, the assets belong to the charity, not to you. The IRS treats every dollar paid to an insider as a potential raid on charitable assets.

What to do about it: before anyone in the family draws a dollar, confirm two things in writing — that the job is a “personal service” and that the pay is reasonable. The rest of this guide shows you how.

Who Counts as a “Disqualified Person” in Your Family

You cannot apply the rule until you know who it covers. Under IRC Section 4946, a “disqualified person” includes a substantial contributor to the foundation, a foundation manager (officer, director, or trustee), a 20%-plus owner of a business that is a substantial contributor, and — critically — members of the family of any of those people.

The family definition is precise and, helpfully, narrower than you might fear. For self-dealing purposes, “family” includes only a person’s spouse, ancestors, children, grandchildren, great-grandchildren, and the spouses of children, grandchildren, and great-grandchildren, as the statute spells out in Section 4946(d).

Who Is Inside the Family Circle

Your spouse, parents, grandparents, kids, grandkids, great-grandkids, and your children’s spouses are all disqualified persons. Every payment to any of them runs through the self-dealing rules. The 10% first-tier tax falls on them personally if a payment is improper, so they have skin in the game too.

The reach is one generation deep on each side plus the in-laws of your descendants. That means a payment to your son-in-law gets the same scrutiny as a payment to your son, because the spouse of a child is squarely inside the circle.

Who Is Outside the Circle (a Useful Surprise)

The definition deliberately leaves people out. Siblings are not on the list. Neither are nieces, nephews, aunts, uncles, or cousins. So a payment to your brother is not automatically self-dealing the way a payment to your child is.

Do not relax completely, though. Even when a relative falls outside the disqualified-person definition, the broader “private benefit” and “reasonable expense” rules still apply, and sham arrangements meant to funnel money to insiders can still draw IRS fire. Outside the circle means less scrutiny, not no scrutiny.

The One Exception That Makes Family Pay Legal

The doorway is the “personal services” exception. Under IRC Section 4941(d)(2)(E), the payment of compensation, and the reimbursement of expenses, by a private foundation to a disqualified person “for personal services which are reasonable and necessary to carrying out the exempt purpose of the private foundation” is not self-dealing — as long as the compensation “is not excessive.”

Notice the three tests packed into that sentence. First, the work must be “personal services.” Second, the services must be “reasonable and necessary” to the foundation’s charitable mission. Third, the pay must “not be excessive.” Miss any one and the exception collapses, turning an ordinary paycheck into a taxable act of self-dealing.

The consequence of relying on this exception loosely is severe because it is the only exception that lets you pay an insider at all. If the IRS decides the job was not a personal service — say, your son was really doing building maintenance — there is no fallback. The whole payment becomes the “amount involved” in self-dealing.

A bonus worth knowing: reasonable compensation paid under this exception can count toward the foundation’s annual 5% distribution requirement, as practitioners note in guidance like the Hurwit & Associates self-dealing overview. So legitimate family salaries do double duty.

What to do about it: document, in your board minutes, that each family role passes all three tests before the first payment. Treat the exception as a checklist, not an assumption.

What Counts as “Personal Services” — and What Never Does

This is where good intentions go to die. The IRS reads “personal services” narrowly. The regulations and IRS audit guidance on the personal-services exception describe services that are “essentially professional and managerial in nature.”

Allowed personal services include foundation management by directors and officers, legal services, accounting services, investment management, and general banking, per the Council on Foundations self-dealing guide. Through private letter rulings, the IRS has also blessed asset management, certain real estate management tasks, financing negotiation, advertising, and human resources work as personal services.

What is not a personal service is just as important. Janitorial work, general building maintenance, repair, custodial work, and ordinary secretarial services fall outside the exception, as both the regulations and Tax Court decisions confirm in summaries like the ACC Docket analysis. Pay a disqualified person for those, and it is self-dealing no matter how reasonable the wage.

Family Role at the Foundation	Treated as a Legal “Personal Service”?
Executive director / program officer (managing grants)	Yes — managerial service, allowed if pay is reasonable
Bookkeeper or accountant preparing the books	Yes — accounting is a listed personal service
Attorney handling foundation legal work	Yes — legal services are listed
Investment manager advising on the endowment	Yes — investment management is listed
Janitor, handyman, or building maintenance worker	No — never a personal service; paying an insider for it is self-dealing
General secretarial / clerical-only work	No — outside the exception per IRS guidance

The misconception: “Work is work — if my nephew does any job for the foundation, we can pay him.” Wrong. The type of work decides whether the door is even open. A relative can be paid $20 an hour to manage grants but cannot be paid the same $20 to mow the foundation’s lawn.

What to do about it: write a real job description for each family role and match it against the allowed list. If the job is custodial or maintenance, hire a non-disqualified outsider instead.

How to Set “Reasonable Compensation” the IRS Will Accept

Even for allowed services, the pay cannot be excessive. The IRS defines reasonable compensation as the amount that would ordinarily be paid for like services by like enterprises under like circumstances, an idea echoed in guidance from Exponent Philanthropy on hiring family. There is no magic formula, but there is a clear method.

Build a compensation file before you set the salary. Pull market data from comparable foundations of similar size and mission, document the hours the family member actually works, and have the disinterested board members vote on and approve the figure. This mirrors the “rebuttable presumption” process used under the excess-benefit rules of Section 4958 and is your best defense in an audit.

Size matters. Some practitioners use rough endowment-based benchmarks — one advisor suggests insider board pay rarely exceeding roughly one-tenth to three-tenths of one percent of foundation assets per year in the LinkedIn analysis of foundation salaries, though hours and duties always govern. Treat such ratios as sanity checks, never as safe harbors.

The consequence of overpaying is double-barreled. The excess portion is self-dealing, taxed under Section 4941, and unreasonable compensation can be private inurement that threatens the foundation’s exempt status outright. In the widely cited Boston Globe coverage of a family trust paying three daughters $84,000 each — about 2.1% of the endowment — the pay looked potentially excessive precisely because it dwarfed the asset base.

The misconception: “A small foundation can pay a full-time-equivalent salary even if there is barely any work to do.” No. The pay must match the services actually performed. A $5 million foundation that makes ten grants a year cannot justify a $150,000 full-time salary for a relative who works a few hours a week.

What to do about it: keep timesheets, keep your comparability data, and re-approve compensation annually in board minutes.

The Excise Taxes If You Get It Wrong

When a payment fails the test, IRC Section 4941 imposes a tiered set of taxes. The “amount involved” is generally the excess paid over reasonable value — or the entire payment if the service itself was not a personal service. These taxes apply for each year the act stays uncorrected.

The first-tier tax for 2025 is 10% of the amount involved, charged to the disqualified person who received the benefit, per IRS Publication 5616. A foundation manager who knowingly approved the deal faces a separate first-tier tax of 5% of the amount involved, capped at $20,000 per act, with joint and several liability among managers.

If the problem is not corrected within the taxable period, the second tier bites hard: an additional tax of 200% of the amount involved on the disqualified person, and 50% on a manager who refuses to fix it, as the Congressional Research Service report lays out. “Correction” means undoing the transaction — typically the relative paying the excess back to the foundation.

Worked Example: Overpaying a Family Officer

Maria funds the Reyes Family Foundation and names her daughter Lucia as executive director. The board sets Lucia’s 2025 salary at $120,000. An audit later shows comparable foundations would pay $80,000 for that role and those hours. The “amount involved” is the $40,000 excess.

Here is the math for 2025. First-tier tax on Lucia (the disqualified person): 10% × $40,000 = $4,000. First-tier tax on each knowing manager: 5% × $40,000 = $2,000, capped at $20,000 per act. If Lucia does not repay the $40,000 within the taxable period, the second-tier tax on her is 200% × $40,000 = $80,000 — far more than she was overpaid. Correcting promptly (repaying the $40,000) stops the second tier cold.

Worked Example: Paying for a Non-Personal Service

Tom’s foundation pays his son Eli $30,000 in 2025 to handle building maintenance and repairs. Maintenance is not a personal service, so the exception never opens. The full $30,000 is the amount involved, not just an “excess.” First-tier tax on Eli: 10% × $30,000 = $3,000. The lesson: when the job type is wrong, the entire payment is tainted, not merely the part above market.

Which Situation Applies to You?

The right answer depends on who you are and what the family member does. Use these branches to find your path.

• You are the founder setting up paid roles. Start with the “personal services” list, then build the compensation file and board-approval process before anyone is hired.
• You are a board member asked to approve family pay. You can face the 5% manager tax if you knowingly approve excessive pay, so insist on comparability data and abstain if you are the one being paid.
• You are the family member being paid. The 10% (and possible 200%) tax lands on you, so confirm your role is a personal service and your pay is documented as reasonable.
• The work is maintenance, janitorial, or clerical-only. Stop — hire a non-disqualified outsider, because no amount of “reasonableness” makes insider pay for these jobs legal.
• The relative is a sibling, cousin, niece, or nephew. They are likely not disqualified persons, so the self-dealing trap does not spring — but keep the pay reasonable to avoid private-benefit problems.

Reporting Family Pay on Form 990-PF

Paying family legally is only half the job; you must disclose it. Every private foundation files Form 990-PF annually, and this return is a public document. Anyone — a journalist, a disgruntled relative, the state attorney general — can read what your family members earned.

Part VIII (and the related Part VII compensation line) requires you to list every officer, director, trustee, and foundation manager, with each person’s title, average hours per week devoted to the role, and complete compensation, as explained in the NCFP guide to Form 990-PF. You must also list the five highest-paid employees over $50,000 and the five highest-paid independent contractors over $50,000.

A common filing pitfall: foundations leave the compensation detail blank or list home addresses. The Instructions for Form 990-PF (2025) direct you to report total officer and trustee compensation on the Part VII line and to use the foundation’s address, not personal contact details. Investment advisors paid over $50,000 must appear among the highest-paid contractors, a point stressed in PKF O’Connor Davies’ pitfalls guide.

The deadline: Form 990-PF is generally due the 15th day of the 5th month after the foundation’s tax year ends — May 15, 2026, for a calendar-year 2025 foundation — with a six-month extension available on Form 8868. Missing it brings daily penalties and, after three straight years, automatic loss of exempt status. The consequence of under-reporting family pay is worse: it signals concealment and invites a self-dealing exam.

What to do about it: reconcile your payroll records to Part VIII every year, list family officers honestly, and have a CPA review the return before it is signed.

Federal vs. State Oversight

Federal Rule	State Overlay
Section 4941 self-dealing taxes apply nationwide to all private foundations	State attorneys general (e.g., California, New York) separately police charitable assets and insider deals
Form 990-PF is filed with the IRS and is public	Many states require a copy plus a state charity registration (e.g., California Form RRF-1)
Federal law sets the 10%/5%/200%/50% excise taxes	States may impose their own penalties, removal of directors, or restitution actions
“Reasonable compensation” judged under federal tax standards	State nonprofit corporation law adds its own duty-of-loyalty and conflict-of-interest rules

Federal law is only the floor. Because your foundation is a state-chartered nonprofit, your state attorney general has independent power over how charitable money is spent, including salaries to insiders. Always start with the federal self-dealing analysis, then ask, “Does my state add anything?” Several states require annual charity filings and conflict-of-interest policies that go beyond IRS rules. Check your specific state attorney general’s charities bureau for its registration form and rules.

Mistakes to Avoid

• Paying a relative for maintenance, janitorial, or clerical-only work. It is never a personal service, so the entire payment is self-dealing and taxed at 10%.
• Skipping the comparability study. Without market data, you cannot prove pay is reasonable, and the IRS presumption favors the agency, not you.
• Letting the paid family member vote on their own salary. This destroys the disinterested-approval defense and can expose other managers to the 5% tax.
• Assuming “it’s family money.” Foundation assets are charitable property; treating them as personal funds is the classic path to self-dealing and inurement.
• Failing to correct an improper payment quickly. Waiting past the taxable period triggers the brutal 200% second-tier tax on the recipient.
• Leaving Part VIII of Form 990-PF blank or vague. Missing compensation disclosure is a top audit flag on a public return anyone can read.
• Overpaying relative to foundation size. A salary that dwarfs a small endowment looks excessive on its face and can threaten exempt status.
• Reimbursing personal expenses as if they were foundation costs. Improper reimbursements to insiders are themselves acts of self-dealing.

Do’s and Don’ts

Do’s

• Do write a job description for every family role — it proves the work is a real personal service.
• Do gather salary comparables before setting pay, because reasonableness is measured against the market.
• Do have disinterested board members approve and minute the compensation, to build the rebuttable presumption of reasonableness.
• Do keep timesheets and annual re-approvals, since pay must match services actually performed.
• Do disclose all family compensation fully on Form 990-PF, because the return is public and concealment invites audit.

Don’ts

• Don’t pay insiders for janitorial, maintenance, or secretarial work — these fall outside the exception entirely.
• Don’t let a family member set or approve their own pay, as it voids your strongest defense.
• Don’t guess at “reasonable” — undocumented figures lose in an audit.
• Don’t ignore an overpayment hoping it disappears; uncorrected acts add a 200% tax.
• Don’t forget state charity registration, because the state attorney general can act even when the IRS does not.

Pros and Cons of Paying Family Members

Pros

• Keeps mission expertise in the family, since relatives often know the founder’s charitable intent best.
• Legitimate salaries count toward the foundation’s 5% annual distribution requirement, so the work funds itself.
• Provides accountable, motivated staffing for small foundations that cannot afford large outside teams.
• Allows the family to be fairly paid for genuine professional and managerial work, which the law expressly permits.
• Builds the next generation’s involvement in philanthropy through real, compensated roles.

Cons

• Heightened IRS scrutiny, because insider pay is a top self-dealing trigger.
• Steep excise taxes (10%/5%/200%/50%) if any test is missed, falling on individuals personally.
• Public disclosure on Form 990-PF exposes family salaries to the press and the public.
• Risk to the foundation’s exempt status if compensation is found excessive (private inurement).
• Ongoing compliance cost — comparability studies, board votes, and professional review every year.

What to Do Next

1. Classify the role. Confirm in writing that the family member’s job is a “personal service” on the IRS-approved list — not maintenance, janitorial, or clerical-only work.
2. Build the compensation file. Collect salary data from comparable foundations and document the hours the relative will actually work.
3. Get disinterested approval. Have board members who are not being paid vote on the figure and record it in the minutes before the first paycheck.
4. Set up payroll and records. Treat the relative as an employee or contractor properly, withhold and report as required, and keep timesheets.
5. Report it on Form 990-PF. List the family member in Part VIII with title, hours, and full compensation, and file by the 5th-month-15th-day deadline (May 15, 2026, for calendar-year 2025).
6. Call a professional when it is close. If the salary is large relative to assets, the role is borderline, or you have an existing payment to fix, retain a tax attorney or nonprofit CPA — correction work and a comparability study typically run from a few hundred to several thousand dollars, far less than a 200% tax.

Frequently Asked Questions

Can a private foundation pay a family member a salary?

Yes. For 2025 a foundation may pay a relative reasonable compensation for personal services that are reasonable and necessary to its charitable purpose. Excessive pay, or pay for non-personal services, is self-dealing under Section 4941.

Who is a “disqualified person” in a private foundation?

Substantial contributors, foundation managers, and their family. Under Section 4946, family means spouse, ancestors, children, grandchildren, great-grandchildren, and the spouses of those descendants. Siblings, cousins, nieces, and nephews are not included.

What is the self-dealing tax rate for 2025?

10% first-tier on the disqualified person. A knowing manager pays 5% (capped at $20,000 per act). If not corrected in time, a 200% second-tier tax hits the recipient and 50% hits the manager.

Can a foundation pay my son to do building maintenance?

No. Janitorial, maintenance, and repair work are not “personal services,” so the exception does not apply. Any such payment to a disqualified person is self-dealing, taxed at 10% of the full amount.

What counts as “personal services”?

Professional and managerial work. This includes foundation management, legal, accounting, investment management, and banking services. It excludes janitorial, maintenance, repair, and ordinary secretarial-only work.

How do I prove compensation is reasonable?

Use comparable market data. Gather salaries paid for like services by like organizations, document actual hours worked, and have disinterested board members approve the figure in the minutes before payment.

Can a board member be paid for serving as a trustee?

Yes, if reasonable. Director and officer management services are personal services, so reasonable trustee fees are allowed. The person being paid should not vote on their own compensation.

Does paying family count toward the 5% payout requirement?

Yes. Reasonable compensation for necessary services is a qualifying administrative expense that counts toward a private foundation’s annual distribution requirement.

Where is family compensation reported?

On Form 990-PF, Part VIII. You list each officer, director, trustee, and manager with their title, average weekly hours, and full compensation. The return is public.

What happens if I overpay a relative and do not fix it?

A 200% tax applies. After the 10% first-tier tax, failing to correct (repay the excess) within the taxable period adds a 200% second-tier tax on the recipient plus a 50% tax on a non-correcting manager.

Are siblings subject to the self-dealing rules?

No, generally. Siblings are not “family” under Section 4946, so they are not automatically disqualified persons. The pay should still be reasonable to avoid private-benefit concerns.

Can a foundation reimburse a family member’s expenses?

Yes, if reasonable and necessary. Reimbursement of legitimate foundation expenses is allowed, but it is treated as compensation and the total must not be excessive. Personal expenses cannot be reimbursed.

This article reflects federal rules as of June 2026 and covers tax year 2025. State rules vary by jurisdiction. Tax law changes — confirm current figures with the IRS or a licensed tax professional before you file or pay.